Wednesday, May 2, 2012

Kahn v. United States Sugar Corporation case brief

Kahn v. United States Sugar Corporation
Delaware Court of Chancery, 1985.
1985 WL 4449.

FACTS
-Class action challenging leveraged cash tender offer made by “Sugar” to stockholders.
-Court found breach of fiduciary duty: disclosures made in tender offer solicitation materials did not disclose all materials facts stockholder needed to make fully informed decision as to whether to accept tender offer.  Tender offer coercive.
-Impossible to rescind transaction, damages only appropriate remedy.

-At time of Tender, US Sugar was public co. with 5 million shares outstanding and held by more than 2000 shareholders.
-28% shares held by public, 72% owned by Mott and charities.
-BoD: 8/14: Mott Family and trustees of charities, 3/14: part of management.
-Tender Offer: Mott wished to reduce holdings in U.S. Sugar, but did not want to relinquish ability to exercise majority control over company.
-Market price for U.S. Sugar stock depressed due to sugar glut.
-Mott Interests had competing desires to both receive highest possible tender offer price and still leave Sugar as a viable company not unduly burdened with debt.
-No Independent directors on Sugar Board - but existence of conflict of interest disclosed.

-Prior to transaction, Sugar virtually debt free.  

Issue:  Was the tender offer misleading or coercive/coercive and concealed or buried facts (including asset value and valuations) which, if disclosed, might have led stockholders to conclude that $68 price was inadequate?
-Coercive b/c shareholders told that they had a choice b/t tendering at $68/share or retaining their stock, which after the transaction would no longer be listed on any exchange, would yield no dividends for a minimum of 3 years, and would represent ownership in a company buried by substantial debt? (not coercive, b/c set forth the obvious).

Holding: Tender Offer Statement did not fully comply with requirements for disclosure with complete candor.


ANALYSIS
-First Boston did not actually prepare a thorough valuation study without restraints.
-Failure to adequately disclose methods used to arrive at $68 tender offer price.

-Tender Offer price was arrived at by determining how much debt the corporation could safely and prudently assume.
-In some circumstances, a corp. is under no obligation to offer a particular tender offer price.  Here, however, b/c of highly leveraged nature of the transaction it was coercive and D had an obligation to offer a fair price.

RULES
Coercion: Any tender offer at a premium over market price entails an application of pressure on the offerees.  
-A claim for coercion must state that the Ps, the tendering stockholders, were wrongfully induced by some act of the Ds to sell their shares for reasons unrelated to the economic merits of the sale.
-Actionable coercion does not exist, however, simply b/c a tender offer price is too good to pass up.

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